This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

March 20, 2014

What’s Your State’s Dividend Income Tax?

Different factors, such as state taxation, influence these levies, according to the Tax Foundation

More On Tax Planning

from The Advisor's Professional Library

Selected Provisions of the American Taxpayer Relief Act of 2012
The experts of Tax Facts have produced this comprehensive analysis of selected provisions of the American Taxpayer Relief Act of 2012 (the Act) to provide the most up-to-date information to our subscribers. This supplement analyzes important changes to the tax code with emphasis on how these developments impact Tax Facts’ major areas of focus: Employee Benefits, Insurance, and Investments.

IRAs: In General
Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.

The United States has one of the highest tax rates for personal dividend income in the OECD, according to recent research conducted by the Tax Foundation.

The top federal rate on dividend income for individual taxpayers is 23.8% — 20% for those in the top marginal tax rate, plus a 3.8% net investment tax to fund the Affordable Care Act. At the state level, the dividend tax is as high as 13.3% in California.

To help investors, advisors and others best understand taxes on dividends and the different factors that influence them, the Tax Foundation recently put together a map that shows the combined federal, state and local top marginal tax rate on personal dividend income by state.

The research takes into account the deductibility of state taxes against federal taxes, local income taxes, the phase-out of itemized deductions and special treatment of personal dividend income. (It was conducted by Tax Foundation economist Kyle Pomerleau and communications manager Richard Borean.)

According to the organization, most states tax personal dividend income as ordinary income. As a result, states with high income tax rates have the highest taxes on personal dividends.

The highest top combined (federal and state) dividend tax rate in the United States is 33% in California, followed by New York (31.5%) and Hawaii (31.6%).

Taxpayers in some states with no personal income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) have a top marginal tax rate on personal dividend income of 25%.

New Hampshire and Tennessee do not tax personal income but levy a tax on dividend income of 5% and 6%, respectively.